Seeking Steady Progress, Not Simple Solutions: U.S. Trade Delegation Visits China

In mid-November, the U.S. Advisory Committee on Trade Policy Negotiations (ACTPN) visited China, where it met top officials in Beijing, Chengdu and Shanghai to discuss such issues as intellectual property rights (IPR) protection, subsidies, currency, the trade balance and product safety. The ACTPN was appointed by President George W. Bush and reports to U.S. Trade Representative Susan Schwab.

The week-long visit was a fact-finding and lobbying trip, as the group gathered information, talked to companies and government officials, and engaged in some gentle lobbying. The group then returned to Washington, D.C., to offer advice and insights to the Bush administration.

The committee’s visit to China was led by John Engler, president and CEO of the National Association of Manufacturers, the largest industry trade group in America which represents more than 11,000 small and large manufacturers in all 50 states. The delegation included former U.S. Congressman Mark Kennedy; former U.S. Congressman Scott Klug, who is also managing director of law firm Foley Lardner; Michael Oestreicher, a partner in law firm Thompson Hine; Al Bernard, senior vice president of Manitowoc Company, one of the world’s top manufacturers of construction cranes based in Wisconsin, which makes and sells its products inside China; and Ping Liang, director of global strategic development for Arch Chemicals, a multinational chemical company with operations in Shanghai and Beijing.  

In China, the committee met with assistant governor Yi Gang of the Peoples Bank of China; assistant minister Wang Chao of the Ministry of Commerce; vice chairman Wang Zhaoxing of the China Banking Regulatory Commission; the executive team from the China Council for the Promotion of International Trade; Jack Chang, chairman of Quality Brands Protection; director general Feng Fei of the Development Research Center; vice governor Huang Xiaoxiang of Sichuan Province, and director Xie Hong of the Sichuan Development and Reform Commission.

At the end of their trip, China Knowledge@wharton joined the committee in Shanghai for a roundtable talk on the visit. Overall, the group concluded that an honest and open relationship, along with clear rules and procedures, would be the best way to resolve trade differences. These differences are substantial: The delegation would like quicker appreciation of the currency, less favoritism toward Chinese businesses, a more transparent legal system and a level playing field for U.S. businesses in China. Nobody on the committee expects simple solutions to the issues, which are seen as a natural result of the growing trade relationship. They called for transparency and logic, rather than the shrill dialogue that so often typifies discussions of the U.S.–China trade relationship.

Shortly after the group returned to the U.S., according to a report in the New York Times, China agreed to “end a dozen subsidies that promote exports and discourage imports of steel, wood products, information technology and other manufactured products.” Schwab, in announcing the agreement, said it was a “victory for U.S. manufacturers, producers and workers,” according to the Times.

Below is an edited version of the Shanghai roundtable talk.

China Knowledge at Wharton: What was the message that you delivered to the Chinese government leadership?

John Engler: Among other things, that there has to be a commitment to the protection of intellectual property. There is a strong national commitment, but clearly there are differences in emphasis at the provincial level and local level. That needs to be strengthened everywhere.

There still are some national, provincial or even locally-favored companies. To the extent that this represents an advantage – for example, a permit that can be obtained two months faster than it would take a competitor [to get a permit], or customs clearance that can be achieved faster — those are the kinds of things that are unhelpful. But I would say, for the most part, that people here are very positive and very committed.

Mark Kennedy: A lot of the things we are pushing for are hurting China as much as they are hurting us. When intellectual property rights aren’t protected, Chinese companies can’t develop strong brands. There are a lot of businesses that don’t come to China because they are afraid of IPR. It’s similar in financial services; with the slow pace of financial services reform, Chinese businesses and consumers [find] a less robust financial services market because there have been restrictions on allowing us in. So there are win-win opportunities that would be good for China and good for the people we represent.

Al Bernard: Let me give you the other side as well. Our job is to go back to the U.S. and explain, or try to dispel, some of the perceptions about China on Main Street U.S.A., as well as in the U.S. Congress. There is clearly some resistance there, and this trip has really given us an opportunity … to try and correct the perception of what China is all about.

One of the misperceptions is, in the U.S. we seem to look at one benchmark and that is the trade deficit. Whenever the reports come out about the trade deficit, there is always this imbalance, and therein lies some of the fears that Americans have about China. But I think you have to look at some of the other indices. How much are we exporting to China? If you look at those numbers, they have increased — five fold in the last three to four years in certain cases. Those are the things that I think can help us in getting our message back to the U.S. — that China is a legitimate and viable trade partner.

Ping Liang: We need more cooperation and information sharing, because that is the more productive approach. A lot of these issues are complicated and it takes technical expertise from the U.S. side. As for the Chinese side, they should be open enough to admit that they need to learn from the U.S. side.

China Knowledge at Wharton: What message are you are taking back to Ambassador Schwab?

John Engler: We have to, as a government, continue to work hard to insist that there be transparency in the relationship, that we understand that when a Chinese quality inspection official looks at a U.S. import and says there is a problem with it, they need to be forthcoming about what the problem is, so that we can make our case.

It is profoundly clear that there are American companies here that think it is a win-win situation for American workers and for Chinese workers, and that part of the equation is not well understood back home. There has been too much of an emphasis that says every job loss in the U.S. is because of something that happened in China. For those in the U.S. who think that there is a China problem and it is going to be solved through protectionism, they’re wrong.

Mark Kennedy: Another thing we learned is that China is a big country, and you have to focus on it [as a whole], not just on Shanghai and Beijing. It’s like America. And as consumers advance here and [create] more of a middle class, they are looking to buy branded products. That’s something America does well. We think that there’s an increasing opportunity here for American products.

China Knowledge at Wharton:  So there is a China problem that won’t be solved with protectionism. What is the problem, and what will solve it?

John Engler: A lot of things being said about trade simply aren’t factual, and that is especially true as we head into the presidential election season. There are emotional appeals that in some cases are flat out wrong…. I think what we’ve got to do is say, realistically, where are we with this relationship? It’s a market of 1.3 billion people. India is another big market. Do we compete for those markets, or not? And the answer has to be yes, let’s compete.

Michael Oestreicher: We need to have an intelligent approach to China. We can’t have a bunch of people just giving speeches. We need to find ways to get the people out there who are making policy to become more knowledgeable about what’s going on here, to sit with American companies here, and learn what their experiences really are, and not just have this noise in the background that sets the entire tone of the debate.

John Engler: The other part of this is the product safety issue … . It is a challenge for U.S. retailers selling a product that is deemed to be unsafe, but China is going to have to address this, because they don’t want ‘made in China’ to be equated in consumers’ minds with ‘dangerous, unsafe and risky.’ That will be used by people who want to say, ‘Let’s tear up this relationship with China and we should do it because the products are unsafe’. Certainly not all the products are unsafe, but the problem is that some products are unsafe, and that is going to damage the China brand. China is going to have to be aware of that.

China Knowledge at Wharton: What have you learned about China on this trip that you didn’t previously know?

Scott Klug: We learned that everyone is late for meetings. (laughter). I think one thing we failed to appreciate before we got here is the tension between provinces and the central government, and the impact that has on economics. You make an assumption that this used to be a centralized Communist government that was hostile to business. You would think that when they make the decision to go the other way, they could solve every problem at once. But what we’ve learned is that some provinces work well, some don’t, and sometimes the national government can solve problems, and sometimes it can’t.

We see this tension a lot with IPR, where clearly American businesses know which provinces are protecting IPR and which ones are not. And I think smart Chinese provinces will figure out that better tax policies, better rule of law, better intellectual property will go a long way to furthering their development.

Al Bernard: I always considered myself pretty young, I’m in my mid-50s, but I can see that China is really serious about reform — economic or political — by the youth that I’ve seen. Most of the officials we met with were five to 10 years younger than I was, and to me that sent the message that China was really serious about some of the things that they are doing.

Ping Liang: I’m from Beijing. I left China in 1989, and one thing I learned from meeting with Chinese government officials, whether it was a central government or a provincial government, was how open they are. Of course my memories are from a long time ago, but I was quite impressed with their openness, and also with the way they think. It is a lot closer to what we think of as the Western, or modern, type of thinking.

Michael Oestreicher: I do agree with Scott, that the influence of the provinces was something I had to recalibrate. The other thing is that, as a lawyer who advises companies, I usually hear the problems, so I was actually surprised to hear from so many companies about the success that they are having here — and the attitude they have, how pleased they are about the success of their businesses here and back in the U.S. That made a big impression.

Mark Kennedy: What’s been surprising to me is meeting with Chinese officials and having them talk about cutting taxes, reducing regulations and promoting business. When we met with the Chengdu chamber, I said that to a large extent, a business’s chance to succeed is a question of how heavy the hand of government is. I asked, ‘Who has a heavier hand of government, in a negative way, America or China?’ and one of the participants pushed back and said, ‘You’re all wrong. You are thinking that the hand of government is negative here.’ In at least some provinces like Sichuan, he thought that the hand of government was positive, even for American firms here in China, versus the negative view of government back home in America.

Scott Klug: I’ve gained an appreciation of the challenges China faces. In the U.S., we have this view of an all-powerful China that can’t be stopped. And then you look at the energy challenges the country faces, and the traffic, which is why we’re so late. I was talking to somebody today at lunch about the problem of getting a bank loan. [As for] individual credit cards, how do you get a credit history? And if an individual defaults on a credit card, how can you collect it? So if you look at all the problems that China faces, it’s pretty amazing that they have gotten as far as they have. I think everyone else on this panel agrees that in the long run, we’ll both do better, the U.S. and China, if we stay fully engaged, and work harder to open these markets.

China Knowledge at Wharton: You met with the people at the central bank. What were their thoughts on the currency?

John Engler: They made it clear that the currency is going to appreciate, and they were quick to point out that there has been about an 11% appreciation since the fixed peg was broken. They expect it to make steady progress, at a rate that was not defined, over a time period that was not defined. We had the chance to reiterate that there needs to be continuing progress.

Speaking for myself at the National Association of Manufacturers, we believe the currency is undervalued. We have also said that it is one of many issues that are important to address, along with intellectual property protections, how the rule of law is implemented, the questions of subsidies, a long list. But the exchange on currency was pretty straightforward. It is clear that there won’t be a big bang, something done overnight. Nor did we advocate a big bang.

China Knowledge at Wharton: How did your members respond to the pace of the RMB appreciation?

John Engler: They’d like it faster. Actually, opinion is split. Some are thinking it’s just about right; others want it faster. We have 11,000 members in the association, so they are not all of one mind on this. And there is no question that some of them feel other issues are more critical to them than currency.

China Knowledge at Wharton: There is a belief in China that the U.S. tariffs on Chinese paper are really aimed against China’s steel industry.

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